Monday, 6 February 2017

MUSKRAT: ALLEGATIONS OF PHONY COST ESTIMATES

This is one engineer's story of how Nalcor "low-balled" the cost estimates for the Muskrat Falls project, paving the way for huge cost overruns. The alleged phony estimates led to an inadequate budget for the project, and indiscriminate contract awards — Astaldi a classic example. The engineer states that Nalcor failed to perform adequate due diligence — ignoring well-established processes designed to confirm valid estimates such as those used by SNC-Lavalin. The post also discusses the implications of those allegations for the integrity of our political process.

Muskrat
Falls — A History of Misinformation — 2010 to 2015

In 2010,
Nalcor hired SNC Lavalin (SNC) to conduct the engineering, procurement and
construction management (EPC) for the MF project.A key aspect of the Company's role —
essential to any decision to proceed — was the preparation of a cost estimate.

The $5
billion investment Premier Williams announced at that time quickly became $6.2
billion ($7.4 billion, including the cost of borrowing) as Nalcor sought
sanction from the Dunderdale Government, in 2012. $6.2 billion was the cost
figure Nalcor used in its Application to the PUB and the claim that the Muskrat
Falls option exceeded the “isolated island” option by $2 billion.

But soon
after the provincial government gave its blessing to the much-heralded legacy
project — given boost amidst fanfare, hyperbole, the pillorying of “naysayers”
and embellishments that included the promise of green power, profits in
the billions of dollars, and an end run around an avaricious neighbour to the
export market — sceptics soon learned that the hype could not be sustained.

The truth
about this project began to trickle into the public domain. While the ugly facts ought to have unfolded
as a flood, it seems they were held back by bureaucrats unworthy of the power
to which they had been entrusted.

Was the lid
kept on the "real" price tag of Muskrat Falls in the interest of
re-electing a Tory Government? Did the exigencies of party politics outweigh
consideration of the public's right to know? Was it the case that Nalcor and
the government couldn't care less that the project was a bust before it got
started?

Now, left
for digestion is the source of the falsification of the original project
estimates in consequence of an $11.7 billion price tag — heading for $15
billion, according to many expert engineers.

But this
digestive process is important. It may be beyond the public's capacity to stop
the madness, but we have a right to assess the ethical standards of those who
contrived it.

To begin
with, the original cost of $6.2 billion on which the project was approved was a
complete falsification. The estimate was deliberately kept low — below $7
billion, so as to appear favourable relative to the cost of thermal power
generation.

The likely
costs were known about three years ago, but Nalcor Management kept it a secret,
steadfastly denying that there were major schedule delays and cost overruns,
until it was no longer possible to hide the true status with the election of a
new Provincial Government.”

The
engineer’s claim of falsification of the estimates mirrored those made by other
professional engineers who played key roles in the project. But this
professional gave details of a level of deception that exceeded that heard from
any other quarter.

Following
additional interviews, more details have emerged alleging that the early
project estimates were phony.

The evidence
disputes the assertion by the new Nalcor CEO, Stan Marshall, who appraised the project this way: “It was a gamble. And
it has gone against us.” Obviously Marshall was trying to invoke a “risk”
metaphor. He could simply have said that the sanction decision was the equivalent of
going for broke.

Fictitious
project estimate met pre-determined project cost

Many
engineers who are specialists in their field possess specific knowledge of the
processes which their profession has developed to ensure that owners do not walk blindly
into foolish investments. Some of them now ask: who signed off on the
"Approved for Implementation" cost estimate? Did SNC “sign off”? Was
proper due diligence exercised?

The evidence
surrounding those questions, and the alarming acceleration of cost overruns, is
disturbingly inconsistent with what they consider to be due diligent practices.

The Uncle
Gnarley Blog’s engineering source has now confirmed that SNC-Lavalin was
engaged in the preparation of cost estimates for the project, but that the
company did not issue one “Approved for Implementation”.

Within SNC-Lavalin, an "Approved for Implementation" cost estimate necessarily
follows an “Executive Review” of the numbers. These are rigid processes
essential to concluding a project’s viability — which conclusion, of necessity,
must be matched by an “implementable” budget estimate.

Engineers
state that an Executive Review is an essential and integral part of SNC’s
"Estimate Validation Process."

For a
multi-billion dollar project, the executive review panel — whether of SNC or of
any organization — typically consists of the VP of Project Management, VP of
Construction, VP of Design Engineering, VP of Finance, and VP of Risk
Management.

This
engineer explains that the group’s knowledge and experience coalesces in an
effort to dissect the estimate, and requires that the team charged with
preparing it is faced with the highest level of scrutiny. They are expected to
defend the source and validity of the information, the integrity of the unit
prices, the construction methodology, the project schedule, the risk analysis,
and the proposed contingency allocation.

The process
could take a week to ten days for a multi-billion dollar project.

Upon
completion of the review, any errors and omissions are corrected — and only
then does the "Executive Panel" endorse the estimate.

In the
absence of such a review, major errors can (and do) creep into an estimate with
catastrophic consequences.

In the case
of the Muskrat Falls project, the problem of the budget dated back to 2012 when
Nalcor learned that the cost estimates — prepared by SNC — were not compatible
with the “Scope” of the project. Said the engineer: “we were satisfied on three
levels:

Scope of the project — well defined,

Engineering — major parameters
completed,

Quantities changes — minimal.

But the
fourth — the budget process — was a catastrophe.

And this was
not due to a lack of knowledge.”

“Nalcor
knew”, he said, “that there was a major gap in the project scope vs. the
estimates. Nalcor simply took a policy decision to understate the project
costs.” As a result, the budget allocation for the project was also inadequate.

Low Project
Estimate led to low (wrong) Budget estimate which led to…

With the
project estimate wrong, the budgets associated with the work contracts were
also wrong. “They were,” noted the engineer, “almost always too low.”

He states
that, from the moment project construction implementation began, the bids
received were so much higher than the project budgets approved by Nalcor that
the crown corporation was forced into "creative accounting on a massive
scale”.

The
contrived low budgets inevitably meant that the bids for the contracts far
exceeded the budgets. This was an immediate cause of major project cost
overruns.

It appears
that no “Executive Review” was ever done; if it was, he stated, how such errors
could go undetected remains a mystery.

Having
low-balled the estimates, Nalcor staff soon had to deal with the bids for
various pieces of the work.

The engineer
states that "the sufficiency of the budget appeared to be the only
criterion when awarding a contract."

“Contractor suitability”, he said,
“took a spot that was a distant second.”

The
engineer’s comments provide readers with a glimpse into why diligently prepared and
tested (defended) cost estimates for the Muskrat Falls project were so
critical. They partly explain the project’s current cost estimate of $11.7 billion; the other part relates to the project team’s inexperience and incompetence.
The massive figure also provides insight into Nalcor’s settlement with Astaldi
of a $700 million claim for “extra” costs.

The Astaldi
Fiasco

The engineer
noted that the Astaldi contract was a classic example of how Nalcor dealt with the
insufficient budget and the low-balled estimate.

Demolition of the "Dome"

Said he:
“Here was a contractor who had never worked in Canada, had no experience
working in a harsh environment like Central Labrador — its senior management
never having seen a snow storm. The Company had no idea about low productivity
winter work, no knowledge of managing labour under the kind of labour contract
Nalcor had entered into with the trade unions. Yet, it was awarded the most
critical contract of the whole project simply because the bid fit Nalcor's
budget for the work.”

As if to
underscore the point, he continued: “The Unit costs were so wrong… it did not even include
consideration of our cold weather environment…such estimates should be in a
class by itself… you could see from going through it the bid was so
wrong… because it had so many things left out. The Canadian contractors knew
what they were doing. They were hundreds of millions of dollars higher than the
Astaldi bid.”

The short
list — some bidders had joint venture partners including Canadian firms —
contained four bids for the powerhouse, spillway, and transition dams. The
highest bidder was the Salini joint venture $1.9B, followed by IKC-ONE
partnership $1.7B, Aecon partnership $1.55B and Astaldi $1.0B.

The three
highest bidders might be expected to be close given their prior experience on
heavy civil projects. And in the context of the size and nature of the tender,
they were within striking distance of each other’s bid — that is, except for
Astaldi.

Our current
engineering counsel gave the Astaldi problem additional context.

Normally, he
stated, when such a gap occurs in the bid prices received, a prudent owner will
ask why the big difference. Did the lowest bidder fully understand the project?
What, if anything, was missed? In particular, the owner might ask: why were the
three experienced bidders so much higher than the lowest — the latter having
the least to bring to the table?

Said the
engineer: "If Nalcor noticed it, they ignored it. The evaluation and award
was done behind closed doors with the highest secrecy. Every contract
functioned this way, to a greater or lesser degree."

The
Executive Management of SNC left the project in late 2012. SNC’s continuing
involvement was principally associated with the project’s engineering design.

Nalcor, in
spite of being complete novices (virtually all the management team had come
from the oil industry) brought down the “curtain” on SNC’s substantial hydro
project expertise and did not find it elsewhere. Nalcor took not just the
enormously complex job of procurement and project management in-house, it took
full control over the entire estimating exercise. Nalcor proceeded with what it
perceived was a “saleable” $6.2 billion figure — even though, the engineer
noted, "everyone knew" it was completely unsustainable.

In that way,
Nalcor kept control of the project cost estimates and the assumptions on which
they were based, allowing aggressive “unit pricing”, a low contingency, and
other tricks of the trade to low-ball the estimate and maintain the fiction
that Muskrat was “the lowest cost option”.

Falsified
Forecasts Hidden for Three Years

Nalcor
controlled the public narrative — choosing what the public was allowed to learn
and when — until the low-balled figures could no longer stay hidden beneath the
lie amid fast-rising project costs.

Stated the
engineer:

“Obvious was
the chronic shortage of the amounts budgeted for each contract — hence the
compelling need to falsify the forecasts — until the Provincial Government
changed."

Finally

Since 2012,
costs have risen on the Muskrat Falls project by $4 billion. In announcing that
project costs had ballooned to $11.4 billion in June 2016, the CBC attributed
this comment to the current Nalcor CEO: "I'm not at all surprised that the
cost is where it is," said Marshall, adding the "original estimates were
low."

CEO Stan Marshall

Was Mr.
Marshall telling all that he knew? Is he still content with that explanation? Or, is it just standard industry to falsify project estimates to get the project approved even at the risk of getting the owner in trouble?He might wish to address his remarks again.

This blogger
is not in a position to verify the allegations made here. I can say that the
informant was forthright in answering my questions and that his integrity seems
unassailable. This is a case of one of Nalcor’s own, now no longer in its
employ, explaining to a concerned public why a project on which their hopes and
expectations were raised to a high level has crashed to earth. By any measure,
what he has to say has major implications for the public, for the public purse,
and for the integrity of government.

But there is
more.

This
engineer’s allegations also have enormous implications for politics at the highest level of this province. Readers are reminded of the comment that the
falsification of the project estimates persisted “until it was no longer
possible to hide the true status with the election of a new Provincial
Government.”

If nothing
else, the engineer’s comments place a major cloud over the integrity of our
political system and of our political leaders.

Perhaps the
mainstream media will ask some of the disturbing questions this story evokes.

Perhaps they
won’t.

Premier Dwight Ball

But if the
allegations are true, the public deserves to know if former Premiers were party
to, and aided in, the deception. Did successive Progressive Conservative Administrations play a role in suppressing
low-balled project estimates and huge project cost overruns in an attempt to
secure the election of 2015?

Government
at all levels — bureaucratic and political — must be held accountable. We need
to know if this engineer’s allegations are correct.

Premier
Ball, CEO Stan Marshall: the people of Newfoundland and Labrador deserve those
answers right away.

For the love of God, will someone who has the authority to call a public inquiry, please step up to the plate and give the public at least a sense that someone is looking out for our interests. This whole debacle smells to the high heavens. Those responsible should pay. No one should be above the law which is what this looks like.Look what happened to Bernie Madoff!!!

The institutions entrusted to protect the public interest are all part of this cruel undermining of the treasury.

Sadly the Newfoundland and Labrador's Office of the Information and Privacy Commissioner is abetting the ongoing abuse by refusing to release information on Nalcor spending. Last week the PUB disgraced itself striking relevant studies submitted by GRK. The JRP gave conditional approval despite Nalcor's unwillingness to demonstrate the "least cost" claim.

With a functionally dead media and co-opted political parties it appears rate/taxpayers will continue to twist in the wind. The question posed in this post, will the media ask these questions, is a rhetorical one that we all know the answer to. It is unlikely they will do anything but be stenographers for the authors of this disgrace as they have been to date.

We are indeed the HAPPY PROVINCE where this outrageous situation goes on and so few care.......Pete Sucey mentioned the important work of this blog, but so few of the public care and no politicians it seems. In Corner Brook they they promise some routine medical equipment as if it was a God send, meanwhile no new hospital there, and not even essential services at emergency, either Corner Brook or St John`s. No operators to do a Cat Scan on evenings or weekends......would have to call someone in on overtime, so doctors send patient home without proper assessments. Third world health care.......why build a new hospital when they can`t even staff existing! Yet billions wasted.

Hahahha I just the other day addressed how I went to the corner brook hospital with severe back pain and no cat scan available.....Doctor suggested a kidney stone or aneurysm....Sent home with no idea of my condition..I tell you one think I was a nerveous wreck for a few days an aneurysm is scary....Third world health care is better then what you receive in newfoundland for sure....

One would presume that Nalcor must follow "normal" CPGA accounting rules, where "earned value of projects" must be reported monthly, quarterly, etc. For those in that profession, (Accounting), and who are reading this site, it would be helpful to have running scrutiny of Muskrat's project cost accountings, as entered in the Assets of the corporation.With fiscal yearend approaching, and Provincial Budgeting consultation in process, there may be opportunity to question where all this matter actually is, as compared what the Public is permitted to know.

The British have a system where the citizens can petition for an issue to be brought to the Parliament for debate. The threshold is for 10,000 t sign the petition. Given our population, that would be about 500 signatures here. Presently there is a petition there that asks that Trump not be given the status of a state visit to Britain, which required meeting with the Queen. It proposed that vulgarity etc in Trumps character would be insulting to the Queen. So far 1.8 million has signed, and this must get debated in Parliament. S o we need a petition here for the House to debate the shutdown of Muskrat, given less than half the population indicated by polls support it.

Please forgive me for repeating myself but regardless of anything the Newfoundland government or Nalcor could have said or done, this project was dead in the water without an explicit federal debt guarantee. The feds allowed this project to proceed without the support of the Federal Government's own environmental assessment or the approval of the PUB. The feds gave credibility to this endeavour in the eyes of the hard-working NL tax and ratepayer. They wanted this project? Let them have it. Let them take the assets, and the debt and let them do as they see fit. Next time, however, I hope I don't have to hear anyone repeat that debt guarantees are not an implicit subsidy

Bernard, I agree with your views that the Feds are building their own Boondoggle at Muskrat, and are about to Nationalize this "Asset". Is it then possible that the Public will never know the true cost of the project? It will somehow never be revealed. Will the Auditor General not even get an opportunity to see the "Books"?

First, my views on this are pure speculation. However, I don't think the feds are anywhere near nationalizing the asset and assuming the debt. They are happy for now to provide Nalcor with a bit more rope in the hopes that things work out in the end. I suspect that NL will have to suffer greatly before any such plan is considered. Any federal intervention would be a very messy affair. I suppose my main point is that federal responsibility for this disaster has not been recognized.

The messy affair could be resolved sort of the way NS gave back to Ottawa the offshore oil and gas fields, (Crown Assets), in exchange for some cash, and joint management of the asset. NL, if similarly inclined, could give back the Churchill River as a Crown Asset, in exchange for writing off the Muskrat, (Costs not disclosed). Poof, the Liabilities are off the NL Registry.

I predict that Nlers will weather this storm and be better for it in the end. It is interesting that it is mostly outsiders that are predicting and rejoicing in our present self-inflicted politician-facilitated predicament. A lot of peas though!

First, at least some of us have the courage to attach our names to our post and, go figure, we actually discuss facts. I have a blog post on Tom Adams' website which discusses the economic outlook for NL but I suggest you not read it. Not only am I an outsider but I use facts. Don't worry, I am sure everything will be fine. Second, the federal government is on the hook for $8B - this concerns all of us. I dont think most outsiders have any idea what is going on and it is totally unfair to suggest that I, or any other "outsider" would rejoice in the problems of NL. I am sorry to disappoint you but though I have always been interested in NL, I rarely find anyone else who could care less. Seems to me there is no shortage of concerned "insiders' however.

As for your economic outlook, grim is the word that comes to mind. NL's provincial debt as a percentage of GDP has doubled in the last 3-4 years. The recent budget predicts a further increase in debt of as much as $7B between now and 2022. Now, that doesn't include MF debt - Meanwhile, according to RBC, GDP in NL will actually fall by 5% between 2013 and 2018. I think it is fine for you to predict that NL will recover without help from those "outsiders" but pardon me if this outsider remains concerned.

There you go Bernard another anon named x-mil agrees with your spirit at least, that must be worth something. I have heard some of Tom Adams stuff and she is also badly off base on our situation here in NL.

well Mr Anonymous, most of us participate in these debates because we care about NL. Also, besides you, there are surprisingly few trolls. It is safe to say that all of us non-trolls would be overjoyed to discover that you were right and we are wrong.

BBD has reimbursed about all of its past repayable subsidies/loan it received from the Feds. Actually, the Feds made a net profit for the completed programs (the Canadair Regional Jet (CRJ) being the most profitable one)

We can't say the same thing about the Feds auto bailout - where we actually lost Billions, and that, to American corporations doing little or no R&D here.

Thanks Bernard, you are becoming more transparent. Embraer have complained to the WTO about unfair trade practices and we await the NAFTA implications south of the border. Also federal taxpayers can't get info on the now so far 1.6 billion taxpayer loan/give to this publicly traded , privately owned and apparently poorly managed company!! Something about its being commercially sensitive, sounds familiar doesn't it.

Danny Williams, is that you? Danny, you are on the wrong blog. We were discussing Muskrat Falls and you were saying how confident you were that all is well. We all hope you are right Danny but would love to hear some of your arguments to that effect.

Assume you refer to the Dunphy Inquiry. Workmans Comp people refered to him as a NOISE MAKER. He refered to politicians as pricks, I think, and the RNC officer who shot him he called a Puppet, according to the shooter. What if Dunphy actually called the RNC office a prick instead of a puppet, would this have enraged the officer. We have CBC film arresting a female protester at Muskrat who questioned the officer without using foul language! She asked repeatedly WHAT WOULD YOU DO. That triggered the arrest. This blog is full of noise makers, and rightly so. But would make one nervous when eating Easter Sunday dinner, and a stranger knocks on your door.

I think that what would add insult to injury is that Newfoundland has the finest wind power resource in the country. With these high average wind speeds and a high utilization factor, the wind could produce power for less than the present domestic power rate. The bonus would be that wind turbines could be placed virtually anywhere along the NL coast, right near the point of consumption. Hence, transmission lines would be mercifully short. Another couple of interesting facts are that 1) wind is better matched to the demand profile ie. more wind in the winter and 2) wind power could be developed incrementally, one turbine at a time. It's not necessary to embark on a mega-project. But, politicians everywhere are in the pockets of their corporate masters and spending public money, even if it is largely wasted, is just fine because it butters the bread of the elites. When in doubt, choose the least cost effective option.

About Des Sullivan

Uncle Gnarley is written by Des Sullivan, of St. John's.
He is a businessman engaged in real estate, retail and development companies.
A Director of Sullivan Capital Corporation, he is a former Executive Assistant to Premier's Frank D. Moores (1975-1979)and Brian Peckford (1979-1985).
He also served as a Part-Time Board Member on the Canada-Newfoundland Labrador Offshore Petroleum Board (C-NLOPB).
Uncle Gnarley permitted the use of his highly regarded name provided he could have full access to state his own rather unequivocable opinions. (A more detailed Profile of Uncle Gnarley is described in the very first Post entitled "Uncle Gnarley is alive and well" found on this site.
Sullivan is a firm advocate of sound fiscal management by the provincial government and intends to use this Site as a forum for commentary on the major issues of the day. Says Sullivan, "Newfoundland and Labrador inspires debate on a variety of issues, a veritable Muskrat Falls of opinion".
Readers are invited to leave their opinions, too.
Uncle Gnarley will post every Monday, and more often as events warrant.